In re Professional Financial Management, Ltd., Civ. No. 4-85-1600.

• Decision Date: 12 April 1988
• Docket Number: Civ. No. 4-85-1600.
• Parties: In re PROFESSIONAL FINANCIAL MANAGEMENT, LTD.—MASTER DOCKET.
• Court: U.S. District Court — District of Minnesota

683 F. Supp. 1283

In re PROFESSIONAL FINANCIAL MANAGEMENT, LTD.—MASTER DOCKET.

Civ. No. 4-85-1600.

United States District Court, D. Minnesota, Fourth Division.

April 12, 1988.

Richard I. Diamond and Linda M. Tedford, Estes, Parsinen & Levy, and Alonzo B. Seran, Olson, Gunn & Seran, Minneapolis, Minn., for plaintiffs.

Thomas J. Shroyer and Beth M. Timm, Moss & Barnett, Minneapolis, Minn., for defendants and third-party plaintiffs Professional Financial Management, Ltd., J. Kmetz & Associates, Joseph Kmetz, and James Kmetz.

Wade R. Wacholz, Gislason, Dosland, Hunter & Malecki, Minneapolis, Minn., for defendants Arthur W. Olstead and Olstead & Associates, Inc.

Allen I. Saeks and James G. Bullard, Leonard, Street & Deinard, Minneapolis, Minn., for third-party defendants Mackall, Crounse & Moore, Roger V. Stageberg, and Eric O. Madson.

MEMORANDUM OPINION AND ORDER

DIANA E. MURPHY, District Judge.

The background of this complex litigation, which involves claims related to the "Energy Brain" and "Kiddie Klassics" tax shelter plans, is set forth in the court's April 13, 1987 Memorandum Opinion and Order. On October 27, 1987, almost two years after the original actions were commenced, defendants Professional Financial Management, Ltd., J. Kmetz & Associates, Joseph Kmetz and James Kmetz (the PFM defendants) filed third-party complaints in the four Energy Brain cases and in the three Kiddie Klassics cases.¹ The Energy Brain third-party complaint alleges that attorney Roger V. Stageberg and the law firm of Mackall, Crounse & Moore provided the PFM defendants with legal advice in connection with Energy Brain. The PFM defendants seek contribution or indemnity for any damages awarded to plaintiffs or the Preeshl, Helstad, Shoup & Co. defendants. The complaint asserts claims under section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2); section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder; the Minnesota Securities Act, Minn. Stat. § 80A.01 et seq.; and under a negligence theory.² Now before the court is a motion by MCM to dismiss or to strike all of the third-party complaints.³

Background

The extent of MCM's involvement with the tax shelter plans is disputed. With regard to Kiddie Klassics, MCM points out that it was not retained until January 1982, after the investors had executed their leases in late 1981. Another firm had represented PFM in 1981 in setting up the Kiddie Klassics arrangements. MCM asserts that it only assisted PFM in preparing responses to inquiries from the Minnesota Department of Commerce in connection with its investigation into Structured Shelters, Inc., one of the promoters of Kiddie Klassics. PFM contends that Stageberg advised Joseph Kmetz not to disclose the state's investigation to the investors and advised PFM to collect the second lease payments in June 1982 despite the investigation. PFM states that it relied upon the advice of MCM with respect to all aspects of the plan after January 1982.

MCM states that it was first approached by PFM in September 1982 concerning the Energy Brain plan. It claims that other law firms had prepared the formal tax and securities opinions concerning Energy Brain. Stageberg says that he spent less than nine hours reviewing the securities aspects of a sales memo used and never rendered a formal securities opinion. PFM contends that Stageberg advised that Energy Brain was not a security required to be registered and that he failed to ensure that the due diligence work done on Energy Brain was adequate.

MCM first moves to dismiss the third-party complaints on the ground that they fail to state a claim upon which relief can be granted under Fed. R. Civ. P. 12(b)(6).⁴ MCM argues that no right to contribution or indemnity exists under the federal securities law provisions invoked by the PFM defendants, the Minnesota Securities Act, or the negligence theory alleged.

Discussion

A. Federal Securities Law

Counts 1 and 2 of the Energy Brain third-party complaint assert claims for contribution or indemnity under federal securities law. No express right to contribution or indemnity is provided under section 12(2) of the 1933 Act or section 10(b) of the 1934 Act and Rule 10b-5. The PFM defendants argue, however, that implied rights to contribution and indemnity exist under those provisions.

Even courts that have found implied rights to contribution have declined to find an implied right to indemnity. In Heizer Corp. v. Ross, 601 F.2d 330, 334 (7th Cir. 1979), the Seventh Circuit stated:

Whereas contribution supports the policy of securities legislation, indemnification tends to frustrate and defeat it. A securities wrongdoer should not be permitted to escape loss by shifting his entire responsibility to another party.

Id. at 334; see also Stowell v. Ted S. Finkel Inv. Serv., Inc., 641 F.2d 323, 325 (5th Cir.1981); Seiler v. E.F. Hutton & Co., 102 F.R.D. 880, 885 (D.N.J. 1984); Odette v. Shearson, Hammill & Co., 394 F.Supp. 946, 954-57 (S.D.N.Y.1975). The PFM defendants thus have no right to indemnity under section 12(2) of the 1933 Act or section 10(b) of the 1934 Act.

The PFM defendants' claim for contribution requires separate consideration. The PFM defendants correctly note that a number of courts, including the Seventh Circuit in Heizer Corp., have recognized an implied right to contribution under section 10(b). Since Heizer Corp., the Supreme Court has considered similar arguments for implied rights to contribution under other federal statutes. In Northwest Airlines, Inc. v. Transport Workers Union of America, 451 U.S. 77, 94-95, 101 S.Ct. 1571, 1582, 67 L.Ed.2d 750 (1981), the Court held that there was no right to contribution under the Equal Pay Act of 1963 or Title VII of the Civil Rights Act of 1964. In Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 639-40, 101 S.Ct. 2061, 2066-67, 68 L.Ed.2d 500 (1981), the Court similarly found no implied right to contribution under the Sherman and Clayton Acts.⁵

The Supreme Court established an analytical framework in these cases that can also be applied to claims for contribution under federal securities law. In both cases, the Court attempted to determine the intent of Congress by examining the legislative history and other factors, including "the identity of the class for whose benefit the statute was enacted." Texas Indus., 451 U.S. at 639, 101 S.Ct. at 2066. The Court had little difficulty concluding that the Sherman and Clayton Acts "were not adopted for the benefit of the participants in a conspiracy to restrain trade." Id. Instead, the Court found that the party seeking contribution was "`a member of the class whose activities Congress intended to regulate for the protection and benefit of an entirely distinct class.'" Id. (emphasis in original) (quoting Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 37, 97 S.Ct. 926, 947, 51 L.Ed.2d 124 (1977)). Similarly, the Court found in Northwest Airlines that the Equal Pay Act and Title VII had not been enacted for the benefit of employers, one of whom sought contribution from two unions in that case. 451 U.S. at 92, 101 S.Ct. at 1581. The Eighth Circuit Court of Appeals has applied this standard to claims for contribution under other federal statutes. Green v. United States Dep't of Labor, 775 F.2d 964, 971 (8th Cir.1985) (finding no implied right to contribution or indemnity under § 8132 of Federal Employees' Compensation Act).

Applying this standard to the federal securities law, the court finds it very unlikely that sections 12(2) and 10(b) were adopted for the benefit of persons who have allegedly engaged in securities fraud. Instead, as in Texas Industries, the PFM defendants would be "members of the class whose activities Congress intended to regulate for the protection and benefit of an entirely distinct class" if they were found liable and therefore interested in contribution. 451 U.S. at 639, 101 S.Ct. at 2066. This suggests that an implied right to contribution should not be inferred.

In declining to find rights to contribution under the statutes in question in Northwest Airlines and Texas Industries, the Court noted that Congress knows how to provide expressly for contribution when that is its desire. See Northwest Airlines, 451 U.S. at 91 n. 24, 101 S.Ct. at 1580-81 n. 24; Texas Indus., 451 U.S. at 640 n. 11, 101 S.Ct. at 2066 n. 11. The Court relied upon the fact that Congress provided explicit rights to contribution under three remedy provisions of the federal securities laws. See section 11(f) of the Securities Act of 1933, 15 U.S.C. § 77k(f), and sections 9(e) and 18(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78i(e) and 78r(b). Congress' failure to do so under sections 12(2) and 10(b) suggests that it did not intend to provide for contribution under those sections.

The PFM defendants argue that Northwest Airlines and Texas Industries each expressly declined to express any view as to whether an implied right of contribution exists under the federal securities laws. See Northwest Airlines, 451 U.S. at 91 n. 24, 101 S.Ct. at 1580-81 n. 24; Texas Indus., 451 U.S. at 640 n. 11, 101 S.Ct. at 2066 n. 11. Although the Supreme Court did not issue a ruling with respect to the securities laws in these cases, it nowhere suggested that its analysis was inapplicable to claims of implied rights of contribution under those laws. Moreover, the Court drew a distinction between express and implied causes of action which makes the PFM defendants' claim for contribution under section 12(2) particularly tenuous. The Court "intimated no view as to the correctness of" decisions finding that "when an implied right of action exists under the securities laws, there also is an implied right to contribution." Texas Indus., 451 U.S. at 640 n. 11, 101 S.Ct. at 2066 n. 11. The Court added, however, that these decisions "do not support implication of a right to contribution when...